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It’s been a mixed start for European stock indices so far this morning, with an overall weaker bias. This carries on the lacklustre performance on Wall Street last night when the major indices drifted lower. Nevertheless, many traders feel that US equities are holding up pretty well considering the gains made at the end of last week. Some were expecting a stronger bout of profit-taking to follow on from Friday’s rally on the back of the US payroll release.

Overnight the Reserve Bank of Australia (RBA) kept its headline Cash Rate unchanged at 1.5%. It also indicated that it had finished loosening monetary policy with rates unlikely to be lowered anytime soon. The RBA said it expected the Australian economy would grow around 3% per annum for "the next couple of years" and that inflation would push above its 2% target this year.

Early yesterday WTI and Brent crude tested resistance around $54 and $57 respectively. Both contracts need to break and hold above these levels on a closing basis to have any hope of getting back up to $60. But oil sold off sharply later in the session as traders are unwilling to push prices much higher as US shale production picks up. All eyes will be on US inventory data after tonight’s close and again tomorrow afternoon.

Gold pushed above $1,220 resistance yesterday despite a bounce-back in the dollar. It has given back some of its gains overnight as the dollar continues to improve. But the technical picture looks constructive while gold is also in demand as a safe-haven play.

Stock Index Update

Italian banks weigh

Uncertainty ahead of French presidential election

European stock indices ended yesterday’s session sharply lower with the biggest loss coming from the Italian FTSE/MIB which was down over 2%. Italian banking giant UniCredit began its €13 billion cash call yesterday and its shares were over 5% lower soon after the open. Meanwhile, the Italian insurer Generali is held a meeting to decide on its stake of Intesa Sanpaolo.

Uncertainty continues to grow over the outcome of the upcoming Presidential election. Yesterday the French conservative candidate Francois Fillon attempted to draw a line under the expenses scandal which has just blown up in his face. The brouhaha concerns a large monthly salary paid to his wife for doing surprisingly little. M Fillon apologised but saw no reason to either reimburse the money or to pull out from the presidential contest. Up until this moment Fillon was the least despised of all the candidates on the centre and centre right. However, he now joins Sarkozy and the other French presidential “deplorables” which suggests that the far right Euro sceptic candidate Marine Le Pen is in with a good shout of winning the presidency. It has been widely and repeatedly touted that she would never get past the first round. But once again it’s looking as if the experts and pundits are on the verge of getting it wrong again.

Commodities Update

WTI and Brent continue to test resistance

Gold surges above $1,220

WTI and Brent crude spent most of yesterday’s trading session knocking up against resistance at $54 and $57 respectively. These levels have acted as a cap to prices since early December. Prior to then both WTI and Brent rallied on the back of speculation that OPEC members and a number of significant non-OPEC producers would agree to cut production. Not only was an agreement reached, but the evidence since then suggests a better-than-expected level of compliance.

On Friday the latest Baker Hughes rig count showed that US energy companies added oil rigs for the 13th week in 14. Earlier last week data from both the American Petroleum Institute and Energy Information Administration showed that US crude, gasoline and distillate inventories rose by more than expected. Traders will be keeping a close eye on the latest updates (due after tonight’s close and again tomorrow) to see if this trend continues. If so, this should keep a lid on crude prices for now, unless there’s an unexpected supply disruption or a bullish update on production curbs from OPEC/non-OPEC producers.

Yesterday both gold and silver managed to build on last week’s gains, despite a sharp bounce-back in the US dollar. The move saw gold push above $1,220 - a level which has acted as resistance for the best part of three weeks. Traders were surprised that the two precious metals managed to push ahead despite Monday’s dollar strength. Typically dollar denominated commodities are out of favour when the greenback rallies. However, it looks as if there’s some safe-haven demand creeping in, helped along by some positive upside momentum. This is connected to the increased tension between the US and Iran after Washington imposed fresh sanctions following an Iranian missile test. In addition, there are concerns that France may soon elect a Eurosceptic president. The previous favourite in the race, Francois Fillon, is struggling to deal with an expenses scandal. Yesterday afternoon M Fillon apologised but saw no reason to either reimburse the money paid to his wife for doing next to nothing or to pull out from the presidential contest.

Forex Update

USD in favour on “safe haven” buying

EUR down on concerns of right wing French presidency

The dollar rallied yesterday against all the majors, although this had more to do with euro weakness than dollar strength. Investors were rattled over building uncertainty ahead of French presidential elections in April and May. There is an ongoing expenses scandal which has enveloped the conservative presidential candidate Francois Fillon. Yesterday afternoon M Fillon apologised but saw no reason to either reimburse the money paid to his wife for doing next to nothing or to pull out from the presidential contest.

There are concerns that the scandal has increased the possibility that the far-right candidate Marine Le Pen could win the presidency. Ms Le Pen is anti-European and has suggested that France could take steps to leave the Euro zone.

The dollar fell sharply at the end of last week after Friday’s Non-Farm Payroll release. The headline jobs number was actually dollar-positive, coming in well above expectations. However, investors were more concerned by Average Hourly Earnings which rose less than expected. This, along with Wednesday’s FOMC statement which was more dovish than expected, has helped to reduce the likelihood of a Feed rate hike next month. This is dollar-negative. However, the greenback recovered into Friday’s close and yesterday the Dollar Index popped back above 100.

Upcoming events

Today’s significant economic data releases and events include the Canadian Trade Balance and Building Permits. From the US we have JOLTS Job Openings, Mortgage Delinquencies, the IBD/TIPP Economic Optimism index and Consumer Credit.

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